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Retail Stocks on a Tear: See Who's Leading the Race

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Online retail sales continue to soar, with bellwether Amazon.com, Inc.’s (AMZN - Free Report) market cap topping $800 billion. But, their outsized gains haven’t hampered traditional retailers much. All of retailers have been part of a broad-based rally so far this year but hardly any of them are trading near peak levels. Obviously, they have more room to run and this growth narrative is well supported by strong fundamentals.

From e-commerce and comparable sales trends to profit margins and earnings to traffic, all have improved this year. Given this bullishness, investors should double down on the hottest retail stocks now.

Amazon’s Burgeoning Retail Business

Amazon is well positioned to cash in on the next wave of online retail. The interesting part is that retail accounts for 60% of its revenues. Amazon acquired Whole Foods Market last year and is aiming to expand its fresh food offerings. At the same time, it is trying to succeed in harder-to-deliver categories like apparels through its Prime Wardrobe segment. Such efforts are paying off.

Amazon’s share price went up 1.4% on Jun 4 and finished at a record for the sixth straight session. The e-commerce giant’s market capitalization is now at $801.3 billion. Amazon is just behind Apple Inc. (AAPL - Free Report) , which presently has the highest market cap of $943.7 billion (read more: Amazon's Retail & Budding Web Services Make It a Real Deal).

Traditional Retailers Fight Back

Traditional retailers, by the way, have adapted against Amazon and other digital commercial threat. They are expanding their omnichannel presence and gaining customers. Lest we forget, not long ago, traditional retailers were compelled to downsize their operations to accommodate low customer flow. However, this discouraging trend appears to be over. After all, a number of malls are getting a facelift, which is driving traffic.

Retailers, in fact, are on a hiring spree. They have led the way in hiring by increasing employment by 31,000 last month. This shows that they are in an expansion mode and their businesses are churning out huge profits. And why not? Sales at U.S. retailers rose in broad fashion in April as fatter after-tax pay checks helped compensate the uptick in fuel cost. Per the Commerce Department, sales increased 0.3% in April, matching the median forecast, after a 0.8% rise in the prior month (read more: 5 Stocks En Vogue on a Broad Rise in US Retail Sales).

Retail Stocks Rally

As traditional retailers have started to co-exist with Internet retailers, retail stocks are on a rally mode. So far this year, the SPDR S&P Retail is up 3.5% versus a meager 0.8% of the S&P 500. The two big departmental stores, in particular, surged this year. While the Kohl's Corporation (KSS - Free Report) soared nearly 32% on a year-to-date basis, Macy's, Inc. (M - Free Report) was up 41%.

Diane Jaffee, senior portfolio manager at TCW Group, added that “departmental stores are doing well because of the massive upgrade of Macy’s by Evercore, which said that the worst is over for the sector.” Macy’s has already exceeded same-store sales expectations in the recent quarter and has lifted its guidance for fiscal 2018.

Sports retailers are also among the big winners. Shares of Foot Locker, Inc. (FL - Free Report) , Dick's Sporting Goods, Inc. (DKS - Free Report) and Lululemon Athletica Inc. (LULU - Free Report) are all up more than 15% so far this year. Among smaller retailers, Urban Outfitters, Inc. (URBN - Free Report) and American Eagle Outfitters (AEO - Free Report) , to name a few, are also up more than 20%. Their margin erosion is moderating, comparable sales are rising and profit margins are stabilizing.

5 Top Picks

Given the aforesaid positives, it will be prudent to invest in the best retail stocks. Americans have ramped up spending on wage gains and bigger paychecks owing to the recent tax cuts. This rise in spending levels will lend a boost to retailers. We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Amazon engages in the retail sale of consumer products and subscriptions in North America and internationally. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 47.4% in the last 60 days. The stock’s projected growth rate for the current year is 181.8%, compared with the Internet - Commerce industry’s estimated growth of 9.1%.

Guess', Inc. (GES - Free Report) designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings climbed 4.2% in the last 60 days. The stock’s projected growth rate for the current year is 42.9%, compared with the Textile - Apparel industry’s expected increase of 12.9%.

Lululemon Athletica, an athletic apparel company, together with its subsidiaries, designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings moved up 2.6% in the last 60 days. The stock’s projected growth rate for the current year is 22%, compared with the Textile - Apparel industry’s estimated growth of 12.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Big 5 Sporting Goods Corporation (BGFV - Free Report) operates as a sporting goods retailer in the western United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 21.4% in the last 60 days. The stock’s expected growth rate for the current year is 19.3%, compared with the Retail - Miscellaneous industry’s projected rally of 13.2%.

Burlington Stores, Inc. (BURL - Free Report) operates as a retailer of branded apparel products in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 2.2% in the last 60 days. The stock’s projected growth rate for the current year is 36.8%, compared with the Retail - Discount Stores industry’s estimated growth of 18.4%.

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